Thursday, August 23, 2007

Investing in uncertain Ukraine 

The Kiev I knew when I worked there eleven years ago was a rather drab place. Some newer Western shops dotted around the city, but many cranes stood still for months on end, roads were filled with chuckholes, and not much seemed to be happening. With the political turmoil of the past few years, you'd think things wouldn't have changed much.

Der Spiegel says you'd be wrong.
Gross domestic product powered ahead by an impressive 8% during the first half of 2007, and economists expect the strength to continue, boosted by a surprisingly diverse economy of services, manufacturing, and raw materials. Metals, mainly steel, account for 40% of exports, but most of the growth is coming from manufacturing and services. Production of heavy equipment rose 22% in 2006. And Ukraine's software houses saw their exports jump by 50% last year, to some $250 million.

Investors see promise in the growth. The Kiev stock exchange has more than doubled in size this year, and now boasts a market capitalization of $76 billion-a sixfold increase since late 2004. And a real estate boom has pushed up housing prices by 60% in 12 months. "We joke that as long as all these disputes are going on, [politicians] don't have time to interfere in business," says Taras Kutovyy, chief financial officer at XXI Century Investments, a leading developer that in May raised $175 million in Eurobonds to finance new apartments, hotels, and hypermarkets.
Countries that are seriously divided like Ukraine typically do not provide investment climates that are conducive to foreign firms. Is that what's going on? I don't know. A look at recent economic data indicates much of the influx of foreign trade has come from resurgent Russia rather than Europe or the USA. Construction has been up and down over the last few years. The Economist forecasts 6% growth for the foreseeable future, but whether the investment is productive for Ukraine's future or shop-building for imported goods -- which both the 'Orange' forces and the current parliamentary leaders of the Party of Regions would be happy to accept -- remains to be seen, particularly in the runup to next month's elections, where everyone promises everything to everybody.

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